One of the market’s preeminent bears is waving the white flag…
You’ve probably heard of Michael Burry’s claim to fame. He placed a big, winning bet against the U.S. housing market before the 2008 bust.
More recently, reports surfaced this summer that Burry had made another bearish bet… this time, against the S&P 500 and the Nasdaq 100 indexes. And as we said in DailyWealth, the news spooked a lot of folks who were already nervous about stocks.
The fear surrounding the story was much bigger than Burry’s actual bet. Even more, though, it now appears that Burry’s bearish call may not have gone according to plan…
Last Tuesday, a filing from the U.S. Securities and Exchange Commission revealed that Burry closed his large short position.
It’s too soon to know when Burry abandoned his bet against stocks. But we do know why… His bearish thesis no longer matches the facts.
The reality is, stocks are strong today. The S&P 500 is staging a furious rally. And its recent price action could spell a big year of gains to come.
Let me explain…
Stocks fell into correction territory in October. Investors feared the worst… so they sold shares fast.
But now, that fear has evaporated. Stocks found a bottom, and investors are piling back in.
This about-face caused a rare “whipsaw” in the market’s relative strength index (“RSI”)…
The RSI is an indicator that tells us when investors are getting carried away in either direction.
If folks bail on an asset too quickly, the RSI will drop below 30. This tells us the asset is “oversold.”
On the other hand, if folks pile into an asset too fast, the RSI will rise above 70. This tells us the asset is “overbought.”
The RSI hit an oversold reading of 29 on October 27. But 14 trading days later, it peaked at about 68 – just shy of overbought territory. Take a look…
I was curious what this sudden reversal in the RSI meant for the future. So, I tracked down every other time we’ve seen a similar event since 1927.
I tested for a couple of factors. First, the RSI had to climb to a new high of 68 or more. Second, it had to have been in oversold mode 14 days prior.
It turns out, whipsaws like this are exceedingly rare. But they’ve led to some big returns for stocks over the next year. Take a look…
Since 1927, we’ve only had five RSI whipsaws like the one we saw this month. And 80% of these cases led to outperformance.
Stocks have returned about 6% a year since 1927. But the average yearly return after an RSI whipsaw was more than double that.
What’s more, three of the five signals led to staggering double-digit annual returns. In 2016, this signal returned 18% in a year. In 1971, it returned 21%. And in 1982, this signal produced a return of 40% in a year.
Now, our sample size is too small for this to be a bulletproof buying signal. It’s just an extremely rare situation for stocks to blaze back this aggressively. But history says it has a bullish tilt.
This signal is another piece of evidence that a bull market is here in earnest. Only two weeks ago, stocks were just about as hated as they could get.
That’s starting to change already. And it tells us the market could be poised to soar more than anyone expects.
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Source: Daily Wealth